20 grudnia 2006 r.

At times it seems that Poland is three different countries. One is peopled by politicians, journalists, top businessmen and others obsessed with Warsaw and its political crises, arguments with Russia and Germany, sex and bribery scandals and lack of action on economic reforms.

The second Poland is to be found in the booming modern big city retail malls, such as the Manufaktura shopping centre in Łódź, in central Poland, where well-dressed people wander through shops inside a converted red-brick 19th century textile factory. This Poland is an increasingly prosperous forward-looking country racing to catch up with the rest of the European Union.

The third Poland is found in the run-down blocks of flats of small towns and villages, where the low-paid, the unemployed, the sick and the old struggle to pay their bills – and look discontentedly at Polands one and two. Here, the populist parties find much of their support.

Gaps between the political elite and ordinary folk, and between rich and poor, exist in most countries. In Poland they are acute.

In recent local elections, independent candidates won many big city mayoral races. The government is Eurosceptic, but the EU is popular with voters, not least farmers lapping up subsidies. The Law and Justice party of the Kaczyński twins, which narrowly won elections last year, has focused on purging public life of the remnants of communist influence.

Jarosław Kaczyński, the prime minister, talks of a „grey web” of criminals, businessmen, politicians and secret agents corrupting public life. Lech Kaczyński, the president, calls for rebuilding the country. „Not a quick repainting of the remnants left by communism but a complete change. That was not done in Poland and is now being accomplished with great effort.”

Jarosław Kaczyński and his allies have used sharp words to describe their foes, comparing some to communist-era militarised police and denouncing others as „lumpenliberals”. Eryk Mistewicz, a political consultant, says: „This government is like a defensive tower surrounded by enemies.”

But even this tower is not secure. The coalition created by Jarosław Kaczyński with two minor parties, the populist Self-Defence party and the nationalist League of Polish Families, is embroiled in constant problems, ranging from photos of League youth movement members attending neo-fascist rallies to the League’s deputy education minister denouncing evolution, and Self-Defence becoming entangled in a sex-for-jobs scandal.

The leading opposition party, the liberal Civic Platform, is embroiled in internal struggles and has been unable to provide a serious challenge. The ex-communist left has yet to recover from last year’s catastrophic electoral defeat.

The Kaczyński have not shown much interest in economic reform. For the moment, they appear to take economic performance for granted, as the country reaps the rewards of previous restructuring.

Economists have spent 2006 upgrading forecasts. For this year they now expect a 5.5 per cent increase in gross domestic product with at least 5 per cent for 2007. Investment is booming, with cautious domestic companies finally taking the plunge alongside multinationals, not least in services.

Meanwhile, foreign direct investment, which some economists predicted might tail off after EU accession, remains strong, with $10bn forecast for 2006. Exporters, having rationalised their businesses in the slow down of the early 2000s, are expanding fast. Inflation is low. The current account deficit is under control, as, for the moment, is the budget deficit. The Warsaw stock market was trading recently at record highs.

With wages rising and unemployment falling, the benefits are spreading far beyond the big cities. EU aid is also having an impact, particularly in the pockets of farmers and builders, as are the funds sent home from Poland’s estimated 1m migrants working in western Europe.

However, economists worry that without further reforms the country will not fulfil its potential. While 5 per cent growth is high by west European standards, it is lower than the rates achieved by central Europe’s top performers, such as Slovakia and the Baltic states. It is also lower than is needed for rapidly reducing unemployment, which still stands at about 15 per cent, the EU’s highest. The challenge for the next three years is particularly acute, with a demographic bulge among young people coming on to the jobs market. While emigration provides a safety valve, politicians worry about the loss of talented young people who may never return.

To be fair, the government is hardly reckless in its expenditures, even under pressure from the two populist coalition partners. It has pledged to keep the budget deficit under 30bn zlotys ($10.5bn, ∈7.9bn, GBP5.3bn) – or about 2.7 per cent of GDP. However, the central bank argues this is insufficient. The figure would appear to keep Poland well inside the 3 per cent level required for joining the euro. However, next year, Brussels will require Poland to add pension costs amounting to about 2 per cent of GDP to the total, taking the deficit to 4 per cent or more.

Meanwhile, business is pressing for more reforms, including payroll tax cuts, labour market deregulation and improvements in bankruptcy and land planning rules. Also, almost everybody in Poland complains about the lamentable infrastructure, especially roads and railways. The old Polish joke that it took less time to travel between Łódź and Warsaw in the 19th century than today remains true – the 130 km train trip takes almost three hours.

Warsaw plans to use a big increase in EU funds in 2007-13 primarily for infrastructure. But business people worry that even when the money is available red tape and shortages of building workers will still slow progress. The government plans extending motorways from 552km at the end of last year to 1754 km in 2013. But just 6km is planned to be completed next year.

The government also has problems with the remaining state-controlled assets. Privatization has slowed to a crawl, while legal action involving Eureko, the Dutch insurance company, over the botched 1999 privatization of PZU, Poland’s largest insurer, exposes Warsaw to up to Euro 2bn in potential liabilities.

Ministers have challenged the central bank’s independence, engaging Leszek Balcerowicz, the outgoing governor, in bruising fights, particularly over his refusal to block the merger of two banks owned by UniCredit, the Italian banking group. Mr Balcerowicz leaves office in January and president Kaczyński, who will choose the new governor, is expected to favour a less independent-minded successor.

In foreign policy, the Kaczyńskis have deliberately chosen a more assertive approach than their predecessors, notably in the EU. The twins argue that Warsaw owes the old EU no favours, least not Germany, its historic invader. This approach has irritated EU partners and affected Warsaw’s influence in the union. The difficulties have been compounded by a sweep of diplomats seen as unsympathetic to the Kaczyńskis’ views that has left key posts vacant.

Relations with Russia are also tetchy, with arguments raging over trade, energy and historical issues headed by Stalin’s World War Two massacre of Polish officers. Poland is particularly concerned about the Russian-German pact to build a Baltic Sea oil pipeline circumventing Poland. Poles are concerned at the sight of their two former enemies getting together and one minister even compared it to the 1939 Stalin-Hitler pact.

But many Poles seem much more optimistic about their place in the world than their leaders, with 88 per cent saying in a recent survey that they were happy with EU membership. Poles travel, work and holiday abroad in growing numbers. The old sense of inferiority towards westerners is declining. In its place there is a growing realisation that Poland has better prospects than at any time since the 17th century.